Will Europe’s Smaller Companies Deliver Big Returns

European equities have been largely unloved by investors for some time, having lagged their global peers over the past decade: the MSCI Europe ex UK Index has grown by circa 6% pa whilst the MSCI World Index is up circa 11% pa. European smaller companies have fared markedly better than their large cap counterparts however, outperforming the world in 2017 and growing at an annualized rate of over 10% during the last 10 years, as measured by the MSCI Europe ex UK Small Cap Index.1

Indeed, over the long term, European Smaller Companies has been one of the strongest performing sectors across the globe, as can be seen from the chart below2:

Whilst the closing months of 2019 were marked by increasing volatility driven by a slowdown in global growth, Sino-American trade wars and Brexit. All this paled into insignificance in the first quarter of 2020 when cases of COVID-19 infections were confirmed outside of China, shutting down the global economy as the virus swept from China, through Europe and on to the US.

In early March 2020, global stocks saw a downturn of at least 25%, and 30% in most G20 nations, as the pandemic inflicted rising human costs worldwide and the necessary monetary and fiscal protection measures severely impacted economic activity. Global and Euro-area growth are projected at -4.4% and -8.3% respectively in 20203, signalling the worst recession since the Great Depression. The initially savage drops in stock markets were promptly followed by a dramatic bounce from mid-March onwards, Europe included, and by the end of October 2020, a sterling investor had seen a 12-month gain on an investment in European smaller companies of circa 10%, aided by a weak pound.4

Euro small cap – the drivers of positivity

The region’s smaller companies continue to be one of the more attractive investment sectors within world markets, for a host of reasons:

  • it represents a unique blend of industries and companies which are less prominent in other regions
  • European smaller companies have traded at a discount to their peers elsewhere over recent years, and so companies which would potentially command premium ratings in, say, the US are considerably more attractively priced in Europe
  • it is an imperfect market which is ideally suited to active management, especially given the relative paucity of research available on its constituent companies: there are circa 2,500 quoted European stocks with a market capitalization of between £100m and £5bn, compared to circa 400 with a market cap of over £5bn
  • it offers exposure to high growth niches such as fintech, computer gaming, e-commerce and green energy (the EU is leading the world with its green agenda)
  • the policy environment is as constructive for equities as it has been for some time – the considerable support injected into European economies by governments and central bankers – furlough schemes, guaranteed loans, interest rate suppression and the like – have had a positive overall effect and appear to have staved off the worst (although, for companies without a viable long-term business model, this support merely delays the inevitable)
  • historically, European smaller company outperformance has been highly correlated to positive Purchasing Managers’ Index (PMI) data – given this correlation, there is an expectation that the European small cap sector, and indeed value, will outperform as the economy strengthens and PMI data improves further
  • Europe as a region is highly geared to global trade and so should be amongst the first regions to benefit from a post-COVID recovery
  • at circa 1.5x, the price to book ratio (a key indicator of value) of European small cap stocks is currently some 15% below its historic average of circa 1.8x
  • 2021 forecast earnings per share growth for European small cap stocks is amongst the highest of any region (see table below).5

TR European Growth in 2020

Despite the unprecedented market turbulence, TR European Growth Trust (TRG) – managed by Ollie Beckett since 2011 – has performed impressively, achieving total return out-performance of 9% in its net asset value (NAV) relative to the benchmark over the last 12 months.6 Ollie attributes this achievement to a number of factors:

 

  • an undiluted focus on the fundamental worth of a business, at a time when favoring short-term momentum would have proved very costly
  • the diversity in portfolio holdings, with a mix of early-stage growth businesses, sensibly priced structural growth stocks, mis-priced value names and self-help turnaround stories: the trust currently holds circa 130 stocks
  • good stock selection, primarily managing to buy online business models that have benefited from a COVID-19 tailwind at a reasonable price
  • a willingness to go down the market cap scale – early entry into these growth stocks has enabled acquisitions at low valuations
  • it is not a value portfolio, valuation having been out of vogue as a stock market discipline for the last decade; despite that, the trust remains acutely valuation aware – maintaining valuation discipline throughout the market dislocation, it has taken the opportunity to buy some great businesses at good prices and some good businesses at great prices.

At a geographical level, the trust remains overweight in Germany (21.6%) and the Netherlands (8.0%), and has built a reasonably large overweight position in France (13.6%). It remains underweight in Spain and Austria, where it has proved difficult to find attractively valued opportunities for a few years. At a sector level, the trust remains overweight in technology, consumer discretionary and industrials.

The key driver of outperformance, however, has been the trust’s unalloyed commitment to bottom-up stock-picking: whilst risky concentrations are always avoided, index weightings play little to no part in asset allocation and Ollie is comfortable running the portfolio with substantial divergence from the benchmark.

TRG has consistently generated its own investment ideas rather than relying on external analysts, which is fortunate given the declining availability and quality of external analysis exacerbated by MiFID II. To that end, the TRG portfolio management team – Ollie, Rory Stokes and Julia Scheufler – spends hundreds of hours meeting and analysing medium and small-sized companies across western Europe – circa 600 meetings in the course of a typical year. It’s their belief that only through this level of immersive interaction and investigative rigour can the potential for significant outperformance be realised.

Depending on dividends

Despite not targeting income, one of the attractive aspects of the trust relative to its peers is its dividend payment solidity: over the last five years, average annual dividend growth of 25.7% is the highest in its sector.7 A final dividend of 14.20p to shareholders was agreed at the 2020 annual general meeting and, together with the interim dividend of 7.80p, brings the total dividend for the year to 22.00p, in line with last year – no small feat given Q2’s widespread corporate dividend-cutting and suspensions.

Since the end of October, the trust’s outperformance has accelerated post the positive news regarding the Pfizer vaccine, coupled with renewed investor attention on value. Looking beyond COVID-19, some voices are contending that we will see new lows in the market; Ollie doesn’t agree, being of the view that, whilst the market may again show some volatility later in the year as we emerge from the virus lockdown, confidence in an economic recovery is tested, and – as we’ve said – sentiment will undoubtedly be bolstered by the rollout of the Pfizer and AstraZeneca vaccines.

European smaller companies continue to be an attractive area. As already stated, it’s an imperfect market and the TRG team is confident that the hard work it puts into understanding the companies in its universe will enable it to continue to take advantage of further opportunities and mispricing, thereby identifying ongoing sound prospects for the deployment of shareholder capital.

1EUR, 10 years to 30.11.20

2Source: Janus Henderson, DataStream, in GBP, as at 31.10.20. Indices used: Euromoney Smaller European Companies ex UK, FTSE 100, FTSE 250, S&P 500, MSCI Emerging Markets, Datastream UK 10-Year Gilt, MSCI Europe ex UK

3Source: International Monetary Fund, World Economic Outlook, October 2020

4Source: MSCI Europe ex UK Small Cap Index, year to 31.10.20

5Source: TR European Growth Trust PLC, Annual Report 2020

6Source: Morningstar, relative to EMIX Smaller European Companies ex UK Index, as at 31.10.20

7Source: Association of Investment Companies/Morningstar, as at 18.11.20

8Source: Morningstar, as at 31.10.20.

Glossary

Volatility – The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment

Market capitalization – The total market value of a company’s issued shares. It is calculated by multiplying the number of shares in issue by the current price of the shares. The figure is used to determine a company’s size, and is often abbreviated to ‘market cap’.

Price-to-book (P/B) ratio – A financial ratio that is calculated by dividing a company’s market value (share price) by the book value of its equity (value of the company’s assets on its balance sheet). A P/B value <1 can indicate a potentially undervalued company or a declining business. The higher the P/B ratio, the higher the premium the market is willing to pay for the company above the book (balance sheet) value of its assets.

Gearing – A measure of a company’s leverage that shows how far its operations are funded by lenders versus shareholders. It is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes.

Monetary (protection) policy – The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money. Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs. Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money. See also fiscal policy.

Fiscal (protection) policy – Government policy relating to setting tax rates and spending levels. It is separate from monetary policy, which is typically set by a central bank. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.

References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Janus Henderson Investors, one of its affiliated advisor, or its employees, may have a position mentioned in the securities mentioned in the report.

For promotional purposes. Not for onward distribution.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. [Past performance is not a guide to future performance]. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

[Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change]. Nothing in this document is intended to or should be construed as advice.  This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. [We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.]

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors  Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and  Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial  Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

[Janus Henderson, Janus, Henderson, Perkins, Intech, VelocityShares, Knowledge. Shared and Knowledge Labs] are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.

Source: Will Europe’s smaller companies deliver big returns? – CityAM : CityAM

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The Growing Importance of Utilizing eCommerce in Europe Ahead of a Recession

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Oftentimes in the business world, change is forced by necessity. The havoc wreaked by COVID-19 has sent shockwaves throughout world economies and the coming months look set to bring a recession that will dwarf the 2008 financial crisis.

European markets will be among the hardest hit by financial hardship in the coming months. As the continent that’s been significantly affected by the COVID pandemic, international trading and production have largely ground to a hal–leaving brick-and-mortar businesses hamstrung by the circumstances.

It’s imperative that businesses continue to find revenue in spite of the restrictive climate. So it’s perhaps no surprise that 20 percent of micro-businesses in the UK have already set themselves up with an online presence for the first time in a bid to innovate their way to survival. According to Business Matters, a further 45 percent have turned to social media, and almost half have stated that they’ve improved their online capabilities.

As Europe faces up to a period of sustained hardship, an already competitive retail landscape will see widespread losses. The importance of businesses making a successful and productive transition into eCommerce is vital–but it’s also full of hurdles to overcome from both a mechanical and marketing point of view.

Recreating digital rapports.

Taking the step of transitioning into a solely digital business isn’t limited to micro-businesses. The Financial Times has reported on a number of prestigious brands attempting to recreate in-store customer experiences online.

bitmax2Brands and retailers have taken different approaches to maintain contact with customers despite the interruption of lockdown measures. Many brands have looked to social media platforms, where companies have the potential to engage directly with their target audiences and generate interest digitally.

Omega and Zenith have both utilized Instagram Live to hold ‘Speedy Tuesday Live’ and ‘On Air’ events respectively that help consumers interact directly with brand ambassadors and partners as if they were in a brick-and-mortar store.

Elsewhere, brands like Cartier launched a new website for the purpose of showcasing their new designs, while Breitling live-streamed a presentation fronted by Mr Kern, who explained: “We had huge visibility from it – in the hundreds of thousands. Our server imploded and we had to move to YouTube.”

Indeed, visibility has become essential in the online practices of all companies across Europe and beyond at a time where physical locations will remain largely closed and austerity may soon occur.

Building appeal in wider markets.

Europe is facing its worst-ever recession, reports the New York Times. With forecasts of a 7.4 percent economic collapse, it’s inevitable that there will be widespread bankruptcy and unemployment.  With borders remaining closed to visitors, businesses can find new customers by developing a digital presence that can cater to wider markets.

Strategising a transition toward digital marketing can be tricky for small businesses, and it’s important to pay attention to data before attempting to connect with customers. Given the level of competition that’s arriving online for many similar businesses, it’s imperative to work on an online strategy that can help to identify and cater to target markets.

With the physical closure of marketplaces, many businesses’ online visibility will hinge on the content they create and their categorisation by search engines like Google. Creating eye-catching and engaging content can make a significant difference to the marketing efforts of an online business. The use of keywords can help Google to categorise content and display topics that are relevant directly to customers in order to attract them to the right website to make a purchase before they’re drawn to that of a competitor.

Making your social presence felt.

The appeal of social media for businesses looking to grow their presence online is vast. In the first half of 2020, as many as 3.5 billion people have been clocked logging into social media platforms on a daily or weekly basis. Such mind-boggling figures show that it’s essential for businesses to utilise these platforms in the time of recession.

Once again, organic presence can play a significant role in positioning a business directly in front of the right customers at the right time. This is because searchable, keyworded content can work wonders in drawing in audiences, while hashtagging and social sharing are both excellent ways for helping a company to go viral.

An emerging trope for modern companies is to enlist the support of “influencers” who will actively promote products or services to their huge network of followers, at a cost. The more organic approach of actively engaging with customers and upholding their satisfaction levels can be optimised through social media, too.

Adapting to survive.

Europe is faced with a testing series of months and years before a full recovery can be achieved if it’s at all possible.

The survival of businesses will hinge on their adaptability in stepping away from traditional brick and mortar stores and transitioning into digital markets that can interact and sell to customers around Europe and the rest of the world.

Building an online presence is key, and enlisting some SEO tactics can go a long way in making a company more visible online. In a hyper-competitive marketplace, it’s never been more important to evolve and adapt to keep ahead of the competition.

Dmytro Spilka

By:

Source: https://www.entrepreneur.com/

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Apr.28 — European Commissioner for Economic and Financial Affairs Paolo Gentiloni discusses the economic fallout of the coronavirus pandemic and plans for a European Union recovery fund. He speaks with Bloomberg’s Francine Lacqua on “Bloomberg Surveillance.”

Google Hit with Record $5 Billion Antitrust Fine by EU – Genevieve Dietz

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The EU has taken up arms against Google’s mobile empire in the form of a record-breaking 4.34 billion euro ($5 billion) fine. EU officials issued the fine on claims that Google illegally favored its own apps over those of competitors.

They claim that because Google requires smartphone manufacturers to pre-install and bundle Google  Search and Chrome in order to use the Google Play Store, it is abusing its dominance and also stunting competition from rival companies. EU officials have stated that the steep fine was issued to protect European consumers.

In an interview with CNBC, EU Commissioner for competition Margrethe Vestager stated,

“The fine reflects the fact that this has been going on for quite some time. This is a strategy that has been in effect since 2011 and two of the three illegal restrictions are still in effect. It is an ongoing abuse.”

Vestager also stated,

“The thing that Google has to do now is of course to stop,” and “They have products that we all like and like to use. The only thing we don’t like is when they get to misuse their success and put in place illegal restrictions.”

The EU has given Google 90 days to pay up on its antitrust penalties and stop the practice or face further charges of 5% of parent company Alphabet’s daily worldwide revenue. Vestager noted that once Google stops its antitrust infringement, the market will free up.

Google announced today that it is fighting back against the ruling by planning an appeal. In a blog post, Google CEO Sundar Pichai states,

“A healthy, thriving Android ecosystem is in everyone’s interest, and we’ve shown we’re willing to make changes. But we are concerned that today’s decision will upset the careful balance that we have struck with Android, and that it sends a troubling signal in favor of proprietary systems over open platforms.”

Pichai also pointed out that users have the freedom to delete preloaded apps in favor of “apps made by some of the 1.6 million Europeans who make a living as app developers.” He noted that the Commission’s decision ignores user’s freedom of choice and evidence of how people use their phones.

This ruling marks the third antitrust lawsuit laid on Google by the EU. In 2016, Google was accused of blocking rivals on Adsense. As of April, they were advancing on that Adsense case and as of today, it was confirmed that the case is still under investigation.

Last year, the tech giant was also slammed with a $2.7 billion penalty for favoring its shopping service over others.

What This Means for Marketing

This fine not only threatens Google’s dominant position in the mobile sphere, it also threatens their rapidly expanding mobile ad business. In turn, the thousands of marketers who promote ads on Google mobile devices may be negatively affected.

If you account for the shopping service fine issued last year, Google currently faces penalties of over $7 billion. These fines could dramatically increase if the EU decides to hammer down on Google’s Adsense and online ad contract practice.

In a nutshell, this potentially high Adsense penalty is the EU’s defiant way of getting Google to stop blocking search engine rivals on third party sites.

If Google fails to appeal to the EU, then they will lose a huge chunk of mobile ad space territory, a territory that has grown exceedingly large and competitive in recent years.

More and more people are using their smartphones for web browsing, streaming, gameplay, and other internet-based tasks so having acreage in mobile is crucial for Google to maintain their dominance. It’s also crucial for marketers to think seriously about promoting their content via ads on mobile.

It’s unlikely that this ruling will cause Google’s ad empire to topple but there’s a big chance the tech giant could lose their traction in Europe. It’s definitely worthwhile for European marketers to pay attention to these rulings and anticipate some Google ad changes.

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